There are several types of consumer debts that you will encounter in life and each one is different from the other. There are a number of debt accounts that can help you reach your goals in life but they are usually the ones that are hardest to pay off. That being said, it is a good idea to know the pros and cons so you can weigh your decisions carefully. Here are a few of them worth looking into.
There are a number of consumer debts but one of the most popular ones is people take on is a mortgage loan and it is something they get out of choice. It is still a big American dream to own a house of your own and sadly, that is something that is out of reach for most people. That is if they want to buy one outright by saving for a house they can call their own.
One reason for this is that the median price for a home is about $200,000 according to CNBC. That is a lot of money and it would take you a long time to save up for that. One possibility is that by the time you have saved up enough money for the house, the prices could have changed already. It is also quite a challenge to save up for a house to buy in the future while paying for one you need at present.
This is the reason why a lot of people take out mortgage loans in order to buy a house. You still need to save up for a downpayment but that will only be a percentage of the total price. The reason why it is one of the hardest debt accounts to pay off is that it is usually a big amount you have to borrow. Not to add that repayment can also take up to 30 years before you can pay off the house.
Forbes shares that the class of 2016 averaged $37,172 in student loan debt according to Forbes. This is a big amount of money for fresh graduates who are still looking for a job after college. It would seem to be an insurmountable task for someone starting out in life. The amount already puts them at a disadvantage because `they already have debt payments even before they get their first paycheck.
Student loans have gone up the ranks and is now second only to mortgage loan in terms of the overall debt amount. It is even more than credit cards and car loans combined. However, student loans is still considered one of the most helpful debt accounts you could ever take. It allows you to take up higher education and pay for it after the fact.
The problem a lot of people have with it is the fact that they are already in debt even before they get their first paycheck. In case they miss their payments or totally ignore it, they run the risk of wage garnishment. This can be a big problem because you can start to go off budget and begin to miss other payments.
Credit card debt
One of the consumer debts that you need to manage really well has a lot to do with your credit cards. Credit card use has been getting a lot of bad reputation in the past because people cannot keep up with their payments. As a result, they get deeper in debt and start to miss out on their payments increasing the amount they have to pay the next month.
However, credit card use can actually help you manage your payments well. You can assign each card to a specific expense which allows you better monitoring of your expenses. It is also possible to budget better when using a credit card if you have the ability to control your spending. This can even help you improve your credit score as you charge and pay your cards on time every month.
Credit card debt becomes one of the hardest accounts to pay off if you start missing payments. If you do, lenders will start assessing several fees and charges on your account. The next thing you know, you will be paying a bigger amount the next time around. It will also negatively affect your credit score if your late payments get reported.
Once you start talking about consumer debts, one of the most challenging ones is payday loans. Washington Examiner shared that payday loans are considered predatory with 300% to 400% interest rates. This is a dangerous position to be in especially when you start missing payments and this interest rate is added to your bill.
One of the biggest reason why people find the need to take out payday loans is being caught off guard with an emergency. It can be losing a job, needing huge repairs on the car, or getting sick and not being able to get to work. All these can affect your income flow and put your finances at risk. You could start to miss payments and be unable to meet your saving goals.
This is why it is difficult to take out loans that have huge interest rates especially if you are taking them out of sheer necessity. If you do, there is a big chance that you might start to miss payments. When that happens, the amount you need to pay keeps on getting bigger every month. This can put you further in the red and create a bigger debt hole.
How to manage your borrowing?
These types of consumer debts might be hard to pay off but not impossible. Here are a few ways to help you address these debt payments better.
Create and follow your budget
It is important to create a comprehensive budget if you want to pay off your debts. You need to remember also that having a budget is not the end of it. It is only the beginning because you need to start following it as well. There are some people who create a budget but leave it at home when buying groceries. You suddenly come home with more than what you need and you are already off budget.
Charge only what you can pay in full
If you are using your credit card, you need to make sure that you only charge what you can pay off for the month. If you will be forced to make only the minimum payments to stay current on your account, this could prompt your lenders to start putting penalties and other charges on your account. Charge only what you can pay for at the end of the month so it does not become one of the consumer debts you have to worry about.
Save for your emergency fund
As mentioned earlier, taking out a payday loan is mostly out of need especially when you are going through a rough patch. The problem with that is when you start to miss out payments because the interest on those types of loans is huge. You need to start saving for an emergency fund to either lower the loan you need to take out in emergency situations or not take out a loan at all. This will help you get through a challenging part of your life with your finances intact.
Consumer debts can make your finances a lot more challenging than they already are and getting ahead of it is a great idea. It will help a lot of you understand these debt accounts, what they are for, and how you can manage them better.